There is a saying, “It takes one to know one.” I am a convicted felon, former CPA, and former criminal CFO of Crazy Eddie. Today, I teach law enforcement agencies and professionals how to identify fraud and train them to catch the crooks. This blog investigates white-collar crime, securities fraud, accounting irregularities, corruption, and other related topics. Accounting irregularities investigated by me are referred to appropriate government agencies as a whistleblower.

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Friday, March 26, 2010

Is InterOil Built on a Foundation of Fraud?

A report by former LA Times reporter William Lobdell in iBusiness Reporting and an accompanying press release by Fraud Discovery Institute provide disturbing details of fraud allegations made in an ongoing court case by the original investors in InterOil (NYSE: IOC) against company CEO Phil Mulacek. The court documents obtained by Lobdell provide an inside look into Mulecek's desperate court room antics to avoid responsibility for his actions which were later scolded by the Judge in the case. In addition, filings with the Canadian Securities Commissions show that InterOil insiders dumped about $10 million of stock in recent weeks.

Is InterOil Corporation Built On A Foundation Of Fraud, Asks FDI's Barry MinkowLawsuit, set for trial in May, alleges InterOil (NYSE:IOC) CEO Phil Mulacek used a variety of illegal schemes to enrich himself and defraud original investors.

For Immediate Release

SAN DIEGO/EWORLDWIRE/March 26, 2010 --- A potentially massive lawsuit by many of InterOil Corporation's (NYSE: IOC) original investors, who are seeking up to $1.3 billion in damages, worried company CEO Phil E. Mulacek so much that a certain company he controls filed a bad-faith bankruptcy in an apparent attempt to derail litigation set for trial this May. In fact, federal Judge Marvin Isgur said that Mulacek's credibility "diminished" by building a key argument in bankruptcy papers upon a lie.

In a special report released today by iBusiness Reporting ('http://www.ibizreporting.com') - a division of the Fraud Discovery Institute Inc., former Los Angeles Times journalist William Lobdell details stunning allegations made by about 20 original investors in what is now InterOil. Among the claims: InterOil CEO Phil Mulacek forged documents, secretly created a shadowy Bahamian company, and ignored "crippling conflicts of interest" in order to enrich family, friends and himself.

So desperate was Mulacek to evade the consequences of his actions relating to a case going to trial this May, that he filed bankruptcy for a company he controls in what seems an attempt to derail the lawsuit, which is asking up to $1.3 billion in derivative or stockholder claims.

In one candid admission, Mulacek and his attorneys testified that even a $50 million judgment for the plaintiffs would be "devastating" to InterOil. The bankruptcy testimony also showed the precarious financial condition of InterOil, with $60 million in cash and massive amounts of money needed to drill wells ($1 billion), construction of a pipeline ($900 million) and the building and construction of a liquefied natural gas (LNG) plant ($5-7 billion).

To date, InterOil hasn't found any commercial oil or gas.

Federal Judge Marvin Isgur ruled that Mulacek had filed the bankruptcy in bad faith, and the executive's credibility was "diminished" by building a key argument for bankruptcy upon a lie.

"It's hard to know where to start - there's so much in this special report," said Barry Minkow, cofounder of the Fraud Discovery Institute (FDI). "The most serious of these claims is the most obvious - the very foundation on which InterOil was built is a fraud based on the intentional inflation of an asset costing $250,000 which allowed InterOil to refine unleaded gasoline. It was reported to investors by Mulacek to have cost $15 million.

"It is the very artificial inflation of assets that is at the core of the InterOil scheme. Mulacek simply added zeroes in the current scheme - instead of a refinery component not being worth $15 million, he now touts oil and natural gas exploration sites in PNG as being the largest find in the world, yet to date, not one drop of commercially viable reserves has been sold by the company."

The lawsuit also alleges the deception started with one of the company's first assets and that scheme gave an offshore company secretly controlled by Mulacek 5.1 million shares of InterOil - 25 percent of the company's stock at the time - in exchange for nothing.

"This would be nearly unbelievable if this was any company other than InterOil," Minkow said. "All you get is hype-feeding-hope, and criminals know people live on hope and exploit that hope with spin and lies. The company lied about fees paid to Clarion and John Thomas. The company hyped with an endless string of press releases, and yet there are still no commercial reserves and no partner."

Because this information can be found in court documents in the public record and available on IBizReporting.com at 'http://www.ibizreporting.com', it cannot be refuted "no matter how many diversion names supporters call me or other detractors," added Minkow.

For more information, call the Fraud Discovery Institute at 1-888-300-8307, e-mail info@frauddiscovery.net, or visit FraudDiscovery.net at 'http://www.frauddiscovery.net', or IBizReporting.com at 'http://www.ibizreporting.com'.

According to Lobdell's report, a couple of days before filing the filing of the "bad-faith bankruptcy" which the Judge later tossed out, Mulacek "dumped nearly $1.5 million worth of InterOil stock...."

Interoil's lack of full and transparent disclosure

Lobdell goes on to document how InterOil has not yet to come clean with investors about the full potential financial impact of the litigation on the company by lowballing its estimate of potential damages:

InterOil’s 2009 annual report released earlier this month reported that a favorable judgment from the plaintiffs in the Peters case could result in damages exceeding $125 million. The report doesn’t mention the $275 million to $1.3 billion range that the plaintiffs of the Peters case are seeking in damages--figures Mulacek's attorneys used in the bankruptcy proceedings.

Insiders dump shares

While keeping shareholders in the dark, InterOil insiders are dumping huge amounts of stock. According to Lobdell:

Five directors or officers have dumped nearly $10 million worth of stock, according to documents filed with the Canadian Securities Commissions.

On March 5, Director Edward Nicholas Speal sold 30,000 shares at 63.8593 for $1,915,779.
On March 10, Director Gaylen J. Byker sold 30,000 shares at $69.25 for $2,077,500.
On March 16, President and COO William Jasper sold 30,000 shares at $67.47 for $2,024,100.
On March 17, Director Roger Grundy sold 25,000 shares at $66.39 for $1,659,750.
On March 18, Director Christian Vinson sold 30,000 shares at $68.50 for $2,055,000.

When a company like InterOil starts on a corrupt foundation, everything that follows continues to be corrupt. In many ways, Phil Mulacek's transgressions against investors remind me of me, back in my criminal days at Crazy Eddie. We both exploited the hopes of our investors with "spin and lies." During its entire existence, InterOil has issued an endless string of press releases hyping its future prospects and selling hope to gullible investors. Yet, after almost a decade, InterOil has no proven commercially exploitable reserves to show for it.

InterOil filed a false report with the Securities and Exchange Commission claiming that the company paid no fees for a private placement $95 million convertible debt offering. However, documents submitted in another court case reveal that Clarion Finanz (a major shareholder of InterOil) had in fact received $5.7 million in fees.

Those same court documents show how InterOil used Clarion as a buffer to conceal John Thomas Financial's and banned stock promoter Carl Caserta's role in the debt offering. About a year earlier, InterOil told the New York Times that it was not doing business with Caserta.

That deception enabled John Thomas Financial analyst Wayne Kaufman to appear on CNBC and recommend InterOil's stock without accurately disclosing his company's conflict of interest from his company's prior investment banking relationship with InterOil. Afterwards, John Thomas Financial heavily promoted Wayne Kaufman's CNBC appearance to pump InterOil stock to its customers without disclosing its prior investment banking relationship with InterOil. Over the next couple of weeks, InterOil shares rose dramatically and the company was able to force the conversion of its debt to equity.

Actor Shia Labeouf uses his celebrity status to pump InterOil

In a bizaare twist, actor Shia LaBeouf has joined the InterOil stock pumping bandwagon. Labeouf trained at John Thomas Financial to study for his role in the upcoming motion picture "Wall Street 2: Money Never Sleeps." According to a recent New York Post article:

After preparing for his turn as a hedge-fund trader by visiting trading floors of small brokerage houses, LaBeouf in the April issue of GQ talked up the stock of an oil and natural gas exploration company that has yet to produce any of either.

"IOC's momentum is major, and it will surprise to the upside," LaBeouf said in a text message to the GQ article's author, Adam Sachs, using the trader lingo he apparently picked up while prepping for the film.

The 23-year-old star of the "Transformers" franchise was referring to InterOil, a Canadian firm with the New York Stock Exchange ticker symbol IOC that says it's searching for natural gas and oil in Papua New Guinea.

However, after seven years of exploration and drilling, InterOil has yet to produce any proven commercial oil or gas reserves.

Nevertheless, InterOil's stock is up an astounding 385 percent since the start of 2009 -- a feat critics attribute to InterOil's flurry.

Shia LaBeouf learned about InterOil from John Thomas Financial and is using his celebrity status to pump InterOil stock. In my last blog post, I suggested that:

It would be interesting to find out what he knew, when he knew it, and if he traded any InterOil shares. Maybe he can provide details on how John Thomas Financial pushed InterOil shares on it's customers?

This Shia LaBeouf kid is apparently trying his best to make sure that any enthusiasm for the Wall Street sequel is completely drained by the time it hits theaters.

With every puff piece on how he's shown himself a 2000% return in his personal stock trading account, more eyes roll and more sighs of disappointment can be heard amongst the film's would-be core audience - Wall Street itself.

The latest ridiculousness involves Shia's pumping of an experimental oil stock that has no earnings from oil exploration or production of any kind as yet...

[Snip]

Kid, can you just talk about your movie and stop digging your credibility hole any deeper? You seem like a nice guy and no one is rooting against you. When you read this stuff you're saying five years from now, you're going to cringe in embarrassment like the rest of us are doing as we speak.

Try to be a little more Sheen-like circa 1987...in other words, just be cool.

This the SEC may look into. A naive actor is red meat for the SEC, whether as witness or participant, unlike other potential cases.

Conclusion

If Phil Mulacek can screw his original seed investors and his company has shown its capability to file false and misleading reports with the SEC, he is clearly capable of screwing anyone else as he and his cronies continue to sell hope to gullible investors.

Written by:

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

I do not own any InterOil securities, long or short. However, I assisted Fraud Discovery Institute (co-founded by convicted felon, turned fraud fighter Barry Minkow) in researching InterOil.

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“White collar crime is more brutal than violence crime. The actions of one or a few corrupt public officials and corrupt businessmen affect the livelihoods of thousands of people. Treat them with the same disdain as we do treat serial killers because white collar criminals are economic predators. We are serial economic predators." -- Testimony of Sam Antar